Ethics & Public Policy Center

Restoring Economic Orthodoxy

**Remarks from the 25th Anniversary Conference of the Association of Christian Economists (ACE) at Baylor University, Waco, TX, 17 April 2009 — additional charts and graphs are included in the power point slides which can be downloaded here.**

I seem to be an outsider even among outsiders: a non-academic at a conference of Christian economists whose views are often classed (as in our panel) as “heterodox.” Yet as historian of economics Henry William Spiegel noted of the “marginal revolution” that ended classical and launched neoclassical economics in the 1870s, “Outsiders ranked prominently among the pioneers of marginal analysis because its discovery required a perspective that the experts did not necessarily possess.” My paper argues that “neoscholastic” economists building on the original scholastic foundation will similarly prevail because they are more orthodox–not yet in a sociological but already in the strict sense of having right opinion: a theory both more complete and empirically accurate.

I begin with a simple but widely overlooked fact: the logical and mathematical structures of scholastic, classical and neoclassical economics differ fundamentally. Few economists today are aware of the differences because American university economics departments, led by the University of Chicago in 1972, abolished the previous requirement that students of economics master its history before being granted a degree. This calls for a brief, remedial history of economics.

What is economics about? Jesus once noted–and I interpret this as an astute empirical observation, not divine revelation–since the days of Noah and Lot people have been doing, and until the end of the world presumably will be doing, four kinds of things. He gave these examples: “planting and building,” “buying and selling,” ‘marrying and being given in marriage,” and “eating and drinking” (Luke 18:27-28). In other words, we produce, exchange, give, and use (or consume) our human and nonhuman goods.

That’s the usual order in our action. But as St. Augustine first explained, the order is different in our planning. First we choose For Whom we intend to provide; next What to provide as means for those persons. This means we always act on two scales of preference–one for persons as ends and the other for other things as means: personal love and utility, respectively. Since man is a social creature, Augustine noted, “human society is knit together by transactions of giving and receiving. But these outwardly similar transactions may be of two essentially different kinds, he added: “sale or gift.” But finally, Thomas Aquinas latter added, we choose How to provide the chosen means, through production (always) and exchange (almost always). So, economics is essentially a theory of providence: it describes how we provide for ourselves and the other persons we love, using scarce means that have alternate uses.

Scholastic ‘AAA’ economics (c.1250-1776) began when Aquinas first integrated these four elements (production, exchange, distribution, and consumption), all drawn from Aristotle (distributive justice, production, and justice in exchange) and Augustine (personal distribution and utility), into an outline of personal, domestic, and political economy, both positive and normative. The scholastic economic system is comprehensive, logically complete, mathematical, and empirically verifiable. It was taught at the highest university level for more than five centuries by every major Catholic and (after the Reformation) Protestant economic thinker before Adam Smith–notably Lutheran Samuel von Pufendorf, whose work was used by Adam Smith’s own teacher to teach Smith economics and also highly recommended by Alexander Hamilton.

Classical economics (1776-1871) began when Adam Smith cut the four elements to two, trying to explain what he called “division of labor” (specialized production) by production and exchange alone.

Neoclassical economics (1871-c.2000) began when three economists dissatisfied with the practical failure of Smith’s classical outline independently but almost simultaneously reinvented Augustine’s theory of utility, starting its reintegration with the theories of production and exchange.

Thus Adam Smith’s chief significance is not what he added to, but rather subtracted from economics. [Slide 7] As Joseph Schumpeter noted in his History of Economic Analysis,, “The fact is that the Wealth of Nations does not contain a single analytic idea, principle or method that was entirely new in 1776.” The necessity of describing all four facets of any economic event with at most three explanatory equations has condemned classical and neoclassical economists frequently to resort to circular logic and/or empirically false assumptions.

The (neo-) scholastic model is a powerful tool of analysis. In an appendix I compare the scholastic, classical, and neoclassical models and can suggest several applications at the drop of a question. In view of our severe time limits, though, I will focus in my remarks on one simple and striking example, since it provides direct evidence for Augustine’s theory of personal distribution and illustrates the empirical superiority of (neo-) scholastic to neoclassical economics: the inverse tradeoff between fatherhood and crime.

In a famous paper co-authored with John J. Donohue and later featured in his book Freakonomics, Steven D. Levitt argued that after abortion was legalized by several states starting in the late 1960s and nationwide by Roe v. Wade in 1973, millions of fetuses were killed who, when old enough, would have been disproportionately likely to commit crimes. Abortion’s culling of them should therefore have lowered crime rates. To prove this, Levitt and Donohue looked at crime rates 15-18 years after Roe and claimed to have found the drop they had predicted.

However, Levitt and Donohue actually found their results indistinguishable whether they used 1970s or 1990s abortion rates to try to explain overall ’90s crime rates. When both were included the models went statistically haywire (“standard errors explode due to multicollinearity”). Failing to uncover any statistically valid evidence for either a 20-year lag or for no lag, Levitt and Donohue replaced the missing facts with an arbitrary assumption: “Consequently, it must be recognized that our interpretation of the results relies on the assumption that there will be a fifteen-to-twenty year lag before abortion materially affects crime.”

They justified their assumption by quipping that “infants commit little crime.” But nearly all violent crime is committed by men (women are equal only in nonviolent crime) precisely the ages of the fathers of aborted children. [Slide 9] In short, the missing variable is “economic fatherhood.” (“Economic” fatherhood is defined not by biological paternity nor residency with but provision for one’s children.) The relationship between economic fatherhood and crime is a straightforward application of Augustine’s personal “distribution function” to the most valuable scarce resource of mortal humans: our time. [Slide 10]

Including “economic fatherhood” as a variable not only invalidates Levitt’s claim but reverses it. As far back as data exist, rates of economic fatherhood and homicide have been strongly, inversely “cointegrated”–a stringent statistical test characterizing inherently related events, like the number of cars entering and leaving the Lincoln Tunnel. Donohue and Levitt’s correlation is thus shown to be a “spurious regression,” which was misspecified by omitting a crucial variable: the one describing Augustine’s personal “distribution function.” [Slide 11 Legalizing abortion didn’t lower homicide rates 15-20 years later by eliminating infants who might, if they survived, have become murderers: it raised the homicide rate almost at once by turning their fathers back into men without dependent children–a small but steady share of
whom do murder. The homicide rate rose sharply in the 1960s and ’70s when expanding welfare and legal abortion sharply reduced economic fatherhood, and it dropped sharply in the ’90s partly due to a recovering birth rate, but mostly because welfare reform and incarceration raised the share of men outside prison who were supporting children. This scenario didn’t occur to Levitt not because of a lack of ingenuity or data but because of the inherent weakness of the theory he was trying to apply, which Nobel Prize-winning economists George J. Stigler and Gary S. Becker, Levitt’s mentor, called the “economic approach to human behavior.” Levitt was unable to see the true correlation between abortion and crime because he was among the first victims of the epic change in the teaching of economics orchestrated by Stigler, with Becker’s support.

The choice of 1776. [Slide 12] What I call “Smythology” (with two y’s) is the myth that Adam Smith invented or is somehow indispensable to understanding economics. By far the most influential piece of “Smythology” was Milton Friedman’s linking in Free to Choose of “two sets of ideas–both, by a curious coincidence published in the same year, 1776…. the economic principles of Adam Smith…and the political principles expressed by Thomas Jefferson.” Like many other conservatives I found Friedman’s argument persuasive and incorporated it into my own views, until I discovered that the “choice of 1776” was actually a divergence, not a convergence, and of three, not two world views. The third event of 1776 was the death of David Hume.

When the Apostle Paul preached in the marketplace of Athens (probably in 51 A.D.), he prefaced the Gospel with a Biblically orthodox adaptation of Greco-Roman natural law. The evangelist Luke tells us that “some Epicurean and Stoic philosophers argued with him” (Acts 17:18). The same dispute has continued ever since, particularly among scholastic, classical, neoclassical, and now neoscholastic economists.

In (neo-) scholastic natural law, economics is a theory of rational providence, describing how we choose both persons as “ends” (expressed by our personal and collective gifts) and the scarce means used (consumed) by or for those persons, which we make real through production and exchange. By dropping both distribution and consumption, Smith expressed the Stoic pantheism that viewed the universe “to be itself a Divinity, an Animal” (as he put it in an early but posthumousely published essay), with God conceived as its immanent soul, so that sentimental humans choose neither ends nor means rationally; instead, “every individual…intends only his own gain…and is led by an invisible hand to promote an end which was no part of his intention.” By restoring consumption but not distribution, neoclassical economics expresses the Epicurean materialism that claims humans somehow evolved in an uncreated world as merely clever animals–highly adept at calculating means but not ends, since “reason is, and ought only to be, the slave of the passions,” as Hume put it. The three theories provide three views of both human and divine nature, but only the anthropology and theology of the scholastic theory is compatible with Christian orthodoxy.

I don’t underestimate the time or effort it will take. But I confidently predict that in coming decades, neoclassical economists now advocating the “economic approach to human behavior” will either become or else be supplanted by “neoscholastic” economists, who will find full employment rewriting that theory because they understand the original “human approach to economic behavior” of Aristotle, Augustine, and Aquinas.